New College Lenders Step Up

Credit unions are offering more private student loans, creating new choices for borrowers grappling with high college costs.

Nearly 590 of the nation's 6,955 credit unions—member-owned nonprofit financial institutions—offered student loans as of December, according to the Credit Union National Association, a trade group, up more than 50% since March 2011.

ENLARGE

Students at the University of Michigan graduation ceremony in 2010.
Reuters

Though credit unions account for just a tiny slice of the student loan market, the amount they hold nearly doubled to more than $2 billion in the same period.

Credit unions control some 8% of the roughly $8 billion annual market in private student-loan originations, according to 2nd Order Solutions, a credit-risk advisory firm. More than 90% of student loans are originated by the federal government.

Student loans from credit unions can be among the least-expensive options for borrowers, says Mark Kantrowitz, publisher of Edvisors.com, which runs college-planning and financial-aid websites. But "you need to do your due diligence," he says. Interest rates vary substantially, from around 2.75% to 9.3%.

For loans directly issued by the federal government, rates are currently fixed at 3.4% for subsidized loans, 6.8% for unsubsidized loans and 7.9% for Plus loans made to parents and graduate students.

One major downside: Loans issued by credit unions and other private lenders generally don't have the same protections and payment options as federal student loans, such as income-based repayment and longer deferment and forbearance.

Credit-union executives say they aren't trying to compete with the federal government.

"We always want borrowers to get their funding from government sources first," says Tim Mislansky, senior vice president of Wright-Patt Credit Union in Fairborn, Ohio, which has $2.6 billion in assets and serves nine Ohio counties. Its loans are intended to fill the gap between total costs and what can be paid for by grants, scholarships and federal loans, he says.

The growth of credit-union lending comes at time when other financial institutions have retrenched. Private lenders made about $8.1 billion in student loans in the 2011-12 academic year, estimates Moody's Investors Service, down nearly 70% from $25.2 billion in 2007-08. Citigroup,J.P. Morgan Chase and U.S. Bancorp have all pulled back or exited from the business.

For some credit unions, student loans are a way to attract younger members. Aspire Federal Credit Union, in Clark, N.J., says the average age of its members has dropped to 42 years from 44 since it began offering student loans four years ago. Aspire, which has $185 million in assets, primarily serves employees of government agencies, such as the Federal Aviation Administration, and companies such as Whole Foods Market.

In March, Shelby Jenkins, a Cleveland pharmacist, consolidated $120,000 in private student loans with interest rates of 7% to 13% into a single loan with a 5.5% rate from Aspire. The $534 per month in savings will allow Ms. Jenkins to more quickly pay down the balance on another $60,000 in private student loans she didn't consolidate.

"I felt buried" before the loan consolidation, says Ms. Jenkins, whose borrowing climbed when she took two years longer than expected to graduate.

Even borrowers with good credit can have trouble refinancing student loans. On Wednesday, the Consumer Financial Protection Bureau outlined a set of options designed to encourage such refinancings. "There is a tremendous opportunity for lenders to take advantage of an underserved market," CFPB Director Richard Cordray said.

Andrews Federal Credit Union, in Suitland, Md., says it is entering the student-loan business this summer in response to member demand. When families asked for help with college borrowing, "we had to offer them an unsecured signature loan or a home-equity loan," says Linda Garboczi, vice president of marketing at Andrews, which has $940 million in assets and primarily serves the military.

Some credit unions require borrowers to apply for a new loan each academic year. Others issue lines of credit that set a maximum borrowing amount over a college career, provided the borrower remains in good standing. Credit unions can hold the loans on their books or form consortiums that allow them to share the risk.

Borrowers comparing private student loans might have to do some work. They often must apply for a loan to see if the attractive rate advertised on a lender's website is the one they will actually receive, says Mr. Kantrowitz.

Variable-rate loans have lower initial rates than fixed-rate loans but can be more costly if interest rates rise. Comparing variable-rate loans can be tricky because some private student lenders tie rates to the prime rate while others use the one-month or three-month London interbank offered rate, or Libor.

Like other private lenders, credit unions typically require that students have a parent as a cosigner and base loans on a borrower's creditworthiness.

UW Credit Union, based in Madison, Wis., this month will begin allowing borrowers to consolidate existing private student loans but not federal ones.

"A large number of our members have financed student loans elsewhere," says Michael Long, chief credit officer at UW, which has $1.6 billion in assets and primarily serves employees and students at the University of Wisconsin system.

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